California Labor Commission rules an Uber driver is an employee, which could clobber the $50 billion company

Seth Wenig/AP
The California labor commission has ruled that an Uber driver is an employee, not a contractor, Reuters reports.

The decision was made after a San Francisco driver, Barbara Ann Berwick, filed a claim against the company.

The commission sided with her largely because it deemed Uber was "involved in every aspect of the operation."

It's potentially a huge blow to Uber's business model, at least in California. There's currently a class action suit going on in which drivers are suing Uber (and competitor Lyft) trying to get classified as employees rather than contractors.

Today's decision is not part of that suit, but it could lend some ammunition to it.

Uber is appealing the board's ruling.

In a statement, Uber said:

The California Labor Commission's ruling is non-binding and applies to a single driver. Indeed it is contrary to a previous ruling by the same commission, which concluded in 2012 that the driver 'performed services as an independent contractor, and not as a bona fide employee.' Five other states have also come to the same conclusion.

By appealing the ruling in the California Superior Court, though, Uber could find itself establishing a precedent.

"If the decision gets affirmed, then it could be a broader precedent," said Shannon Liss-Riordan, the attorney who is representing Uber drivers in a class-action suit against the company.

Even without the affirmation, Liss-Riordan said she can still use the decision to her advantage.

"I think it is significant that the California agency charged with upholding California labor laws determined this driveris an employee under the law," Liss-Riordan said. "Courts often give some deference to a state agency."

Right now, Uber has hardly any costs other than its 3,000-plus employees in its San Francisco headquarters. Uber takes a percentage of every ride (20%-30%). It doesn't employ drivers; it merely connects supply (user requests on its app) with demand (independent contract drivers who are roaming and have agreed to partner with Uber).

If all drivers there were classified as employees, Uber wouldn't just be a logistics company printing money, at least in California.

The cost to run the business there would skyrocket. Uber would have to seriously consider downsizing the number of drivers it has as partners and provide benefits for them all.

Employees are expensive; companies have to pay Social Security and Medicare taxes for each employee among other things, according to the IRS. They don't have to do any of that for independent contractors.

Also, drivers have to cover a lot of their expenses — gas, car maintenance, insurance — though Uber has begun to offer perks to offset some of these costs.

Let's keep in mind that this ruling is only in California. Uber, which was last valued at about $50 billion, has more than 1 million drivers worldwide.

While California is Uber's largest market, the company operates in 311 cities and 58 countries, so this is a small percentage of Uber's global business.

By the way, this ruling isn't just a huge deal for Uber and Lyft. There have been a lot of "Uber for X" startups to follow in their wake: $1 billion startup Instacart, for example, has contract workers deliver groceries; $250 million startup Shyp has regular people mail things for customers.

If these companies, which are referred to as the "1099 economy," can no longer have independent contract workers, all of their business models are shot.

And if their business models are shot, that's pretty bad news for investors who have been pouring unprecedented amounts of money into private companies over the past few years.

Their investments have allowed startups to stay private longer and avoid going public or getting acquired. That means venture capitalists and startup employees haven't had much chance to gain liquidity.

So while Uber is a $50 billion company on paper and investors look like gods who will get crazy returns someday, many haven't actually gotten much cash back yet.

This concept — pouring lots of money into companies without seeing a cash return — is called a "dry bubble." And as Uber board member Bill Gurly recently tweeted:

"Wet bubbles (1999) are more fun than dry ones (2015)."

Below is a copy of the Uber ruling, from June 16.

Driverless cars are probably starting to look pretty good to Uber right about now.